Order eases CBOE's path to shareholder ownership

Cross-town fight returns to Delaware court

Ann Saphir

(Crain's) -- The Chicago Board Options Exchange got the regulatory green light Wednesday on a long-sought rule change that allows it to move forward on plans to convert to a shareholder-owned company.
All four members of the Securities and Exchange Commission approved the rule, which eliminates the right of Chicago Board of Trade members to automatically become members at the CBOE.
The CBOE said in a statement that it will now take steps to dismiss a related lawsuit in Delaware Chancery Court.
At the heart of the rule change is an ownership dispute.
Board of Trade members claim an equity stake in the CBOE, which they founded 35 years ago. But CEO William Brodsky says the Chicago Mercantile Exchange's purchase of the Board of Trade last July eliminates the right of Board of Trade members to trade at the options exchange, and therefore nullifies any claim to an equity stake as well.
The SEC agreed with Mr. Brodsky's assertion about trading rights.
Mr. Brodsky will now seek to translate the SEC's rule change into a legal victory over the Board of Trade, which sued in 2006 to protect what it said were its members'

(Crain's) -- The Chicago Board Options Exchange got the regulatory green light Wednesday on a long-sought rule change that allows it to move forward on plans to convert to a shareholder-owned company.

All four members of the Securities and Exchange Commission approved the rule, which eliminates the right of Chicago Board of Trade members to automatically become members at the CBOE.

The CBOE said in a statement that it will now take steps to dismiss a related lawsuit in Delaware Chancery Court.

At the heart of the rule change is an ownership dispute.

Board of Trade members claim an equity stake in the CBOE, which they founded 35 years ago. But CEO William Brodsky says the Chicago Mercantile Exchange's purchase of the Board of Trade last July eliminates the right of Board of Trade members to trade at the options exchange, and therefore nullifies any claim to an equity stake as well.

The SEC agreed with Mr. Brodsky's assertion about trading rights.

Mr. Brodsky will now seek to translate the SEC's rule change into a legal victory over the Board of Trade, which sued in 2006 to protect what it said were its members' rights to equity in the CBOE.

The judge in the Delaware case last year said he would consider the economic merits of Board of Trade members' claims to a stake in the CBOE once the SEC made its decision.

"We are extremely pleased by the SEC's approval of CBOE's position regarding exercise right eligibility, which should dispose of the claims in the class action in Delaware court," Mr. Brodsky said in the CBOE statement. "We believe this places us in a very strong position to achieve a favorable resolution of this matter, once and for all, in Delaware court."

"We are pleased that the SEC agrees with CME Group that the merits of our claims reside in the Delaware courts," says a CME spokesman. "The ruling clearly emphasizes that the state court's decision takes precedent in preserving the exercise and property rights of CBOT members."

The Mercantile Exchange will continue to fight to "preserve" CBOT members' rights to trade at, and share in the ownership of, the options exchange, he added.

The Mercantile Exchange has the right to appeal the commission's ruling.

Near the end of its 52-page order, the SEC makes clear that the door is open for the Delaware judge to take a different stance.

"This review process is not a forum to litigate state law issues that may arise regarding an SRO's rule proposal," the order says, using the technical designation of self-regulated organization, or SRO, to refer to the options exchange.

Mr. Brodsky wants to restructure the options market into a stock-based institution, which would free him to sell shares to the public. Clarity on who owns the CBOE is critical. Mr. Brodsky said Tuesday that the SEC order would be the "second-to-last stop" on getting that clarity, with the final stop in Delaware.

Ending the current cumbersome membership structure would also make it easier to strike a deal to be acquired by another exchange. Two U.S. options exchanges were acquired by bigger exchanges last year, and the New York Stock Exchange has reportedly had talks to buy a third.

CBOE seat prices have soared on speculation that it will be bought by another exchange or sell stock in an IPO. One of its 930 memberships recently sold for $3.1 million.